Chapter 13 • Management of working capital
lSet inventories reorder levels.
lUse budgets.
lKeep reliable inventories records.
lUse accounting ratios (for example, inventories turnover period ratio).
lEstablish systems for security of inventories and authorisation.
lConsider just-in-time (JIT) inventories management.Trade receivables
lCosts of allowing credit:
lFinancing cost.
lLost purchasing power.
lCosts of assessing customer creditworthiness.
lAdministration cost.
lBad debts.
lCash discounts (for prompt payment).
lForeign exchange losses.
lCosts of denying credit:
lLoss of customer goodwill.
lInconvenience and loss of security.
lPractical points on trade receivables management:
lEstablish a policy.
lAssess and monitor customer creditworthiness.
lEstablish effective administration of trade receivables.
lEstablish a policy on bad debts.
lConsider cash discounts.
lManage exchange rate risk.
lUse accounting ratios (for example, average trade receivables settlement
period ratio).Cash
lCosts of holding cash:
lFinancing cost.
lLost purchasing power.
lForeign exchange losses.
lCosts of holding insufficient cash:
lLoss of supplier goodwill if unable to meet commitments on time.
lLoss of opportunities.
lInability to claim cash discounts.
lCosts of borrowing (should an obligation need to be met unexpectedly).
lPractical points on cash management:
lEstablish a policy.
lPlan cash flows.